Israel financial services

Banks resist Israel financial sector reforms

March 21st 2016 | Israel | Banking

Event

The finance minister, Moshe Kahlon, has launched several legislative initiatives in the banking and financial services sectors in March.

Analysis

Mr Kahlon is committed to promoting consumer-oriented reforms in two key sectors, housing and financial services. In the latter sphere, he has focused on reducing costs for retail customers—including interest rates, commissions and other fees—despite some resistance from the Supervisor of Banks at the Bank of Israel (BOI, the central bank), and has set his sights on the credit-card sector, which is almost entirely owned and operated by subsidiaries of the big banking groups.

The key to opening up this sector is breaking the banks' control of credit data on their retail customers. A previous effort by an earlier government to open the credit-card market, in 2002, foundered precisely on this issue. However, the draft Credit Data Law, which will set up a national credit history database and thus give access to the data to third-party firms, was approved by the Knesset Economics Committee in mid-March. It will now go for its second and third readings in the full Knesset (parliament) and is expected to take effect in 2018, leading to a radical restructuring of the credit-card sector and, its supporters believe, of retail credit in general.

Israel's large banks are under assault from several other directions. On March 16th, the Knesset Finance Committee approved a proposed law that would place a ceiling of NIS 2.5m (US$641,000) on the annual pay (salary and bonuses) of senior bankers, as well as imposing a formula limiting their salary to 35 times that of the lowest-paid employees in their bank. Mr Kahlon is also seeking to reduce the management fees paid on pension and other savings, by introducing "default option" pension funds that will be managed by companies that win competitive tenders based on their fee levels.

The latest wave of legislative and regulatory pressure on the banks and, to a lesser but growing extent, on other types of financial institutions, has been building for some time. The populist approach to these issues is being led by Mr Kahlon, but it is relatively well supported politically and therefore likely to persist for the foreseeable future.

Impact on the forecast

The measures approved by the Knesset will be resisted by banks, but the government is likely to press ahead with the consumer credit law while possibly making some concessions on bank pay. Our forecast for policy trends is unchanged.